Flexibility in Investment Decision-Making under Uncertainty: A Case Study of Volvo Group

Abstract

This thesis describes how investment decisions are evaluated in practice within Volvo Group, focusing on traditional capital budgeting methods, uncertainty and managerial flexibility. The purpose is to describe how projects are evaluated, how uncertainty is incorporated into investment evaluations, and how a real options perspective can contribute to a better understanding of investment decisions within the company. The study is based on a qualitative single-case study, using semi-structured interviews with two respondents involved in investment decision-making at Volvo Group, complemented by internal investment documents. The findings show that Volvo Group primarily uses Net Present Value, Internal Rate of Return, Modified Internal Rate of Return and Payback as part of its investment evaluation process. These methods provide a structured financial basis for assessing and comparing investment projects, but the results indicate that they do not determine investment decisions on their own. Instead, financial calculations are combined with strategic considerations, qualitative factors and the specific characteristics of each investment. The study further shows that uncertainty is incorporated through the assumptions underlying the financial calculations. Key sources of uncertainty include market development, volume, prices, exchange rates and technological change, as these variables are central to expected future cash flows. To manage this uncertainty, Volvo Group complements traditional financial calculations with sensitivity analysis, scenario analysis, risk assessments and qualitative evaluations. The study also finds that Volvo Group does not use real options as a formal valuation method. The concept is not part of the company’s formal investment language, and the valuation models are perceived as too complex for practical use. Nevertheless, several practices resemble elements of real options logic, such as postponing, reassessing, dividing investments into stages, comparing alternative solutions and scaling down or halting investments when conditions change. The results suggest that a real options perspective is useful for understanding Volvo Group’s investment process when the company has managerial discretion, but less relevant when decisions are constrained by legal requirements, environmental regulation, safety needs or long-term strategic direction.